Tanzania Offshore Puts Off Potential Suitors

Tanzania could be preparing for yet another licensing round of its offshore oil and gas blocks in the second quarter of 2019, more than four years after the last auction did not yield the anticipated results on the back of the country's complex regulatory regime.

State national oil company Tanzania Petroleum Development Corporation (TPDC), which owns all licenses for energy development in the country, had indicated in 2018 plans to launch the next licensing round this year targeting blocks 4/1B, Mnazi Bay North and West Songo Songo in offshore Tanzania.

“We welcome investors to our oil and gas exploration blocks which have already proven to have substantial amounts of natural gas,” said Kapuulya Musomba, acting managing director TPDC in a 2018 interview.

It is probably in preparation for the licensing round that TPDC, with government financing, advertised in the last quarter of 2018 the contract for the acquisition and processing of 3D seismic data in 4/1B, Mnazi Bay North and West Songosongo blocks. The tender documents are slated for opening on February 8, 2019, ahead of announcement of the preferred bidders at a time when Tanzania is relishing the increase of its proven natural gas resources to 57 trillion cubic feet (tcf) after large discoveries by Statoil and ExxonMobil.

In 2014, Tanzania offered eight offshore blocks for auction, but only four attracted interest, while the rest did not elicit any response amid speculation some of the blocks posed serious challenges such as water depths between 2,300m and 2,600m. The distance between Tanzania's shore is estimated at nearly 100km while some of the blocks are located in areas considered too far from the already established hydrocarbon fields in the region.

TPDC offered blocks 4/2A, 4/3A, 4/4A, 4/4B, 4/5A, 4/5B all located in water depths of between 2,000m and 3,000m. TPDC also put up for auction the North Lake Tanganyika block after French oil giant Total SA reportedly failed to strike a deal with the Tanzanian national oil company despite having been given exploration rights in 2011.

The response to the bidding round was rather dismal after attracting only five bids for four of the blocks with blocks 4/3B, 4/4A, 4/4B, and 4/5B failing to attract any bids. Deepsea blocks 4/1B and 4/1C had been set aside for TPDC to develop. Reports had indicated bids received came from China National Offshore Corporation, Gazprom, Mubadala and RAK Gas. Curiously, exploration and production companies such as BG Group and Ophir Energy that were already active in Tanzania did not submit bids for any of the eight blocks.

Analysts are still piecing together reasons for the poor performance of Tanzania's fourth licensing round that came with even tougher new model production sharing agreement conditions. This is after TPDC reaffirmed to the oil and gas exploration and production companies that the signature bonus was to be $2.5 million while the production bonus would be $5 million. Royalty rate was increased to 12.5% of total oil and gas production from onshore fields while offshore fields rate was capped at 7.5% as the cost recovery rate was fixed at 50%. In addition, TPDC brought back the capital gains tax despite the oil and gas companies being subject to a corporate tax of 20%.

Although it is not yet clear how much the new model PSA of 2013 contributed to the uptake of the eight offshore blocks on offer during the fourth licensing round, there is a possibility the auction of offshore blocks planned for the second quarter of 2019 in Tanzania could face even more hurdles as international oil and gas companies become wary on the likely impact of the recently approved Petroleum Local Content Regulations.

With the new regulations in place, oil and gas exploration and production operating in Tanzania have now to restructure their system of procuring goods and services including those touching on banking, financial, insurance and legal.

The new local content requirements despite being a common practice among many oil and gas producers in the developing countries could pose a major hurdle when it come to crafting and implementing exploration and production contracts.

Tanzania's case is not made any better by the numerous state agencies involved in regulating the oil and gas sector in one way or the other. It is estimated that at least nine government agencies and companies have a direct role in the regulation of the country's oil and gas sector. Several other peripheral agencies listed under the ministries of Energy & Minerals and also Home Affairs that deals with immigration issues for staff working for international oil companies, are said to have a direct or indirect say on Tanzaia's emerging gas exploration and production segment.

How Tanzania's planned second quarter 2019 offshore licensing round turns out will largely depend on how this East African government responds to concerns about the stifling effect of its hydrocarbons regulations on the country's gas exploration and production operations.